NEW YORK (

TheStreet

) -- Homebuilders were mostly in positive territory Tuesday after a government report showed

construction of new homes rose 1.7% last month

, led by a significant jump in apartment construction.

On the surface the numbers were disappointing. New home construction rose to a seasonally adjusted rate of 546,000 units, from a downwardly revised rate of 537,000 in June, but economists had expected the figure to come in at 560,000 units. The implication is that the housing market continues to flounder as it works to regain its footing after federal tax credits for homebuyers expired April 30.

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

Sector watchers seemed to shrug off the weaker-than-expected data, focusing instead on the small rise in construction, with builders willing to take what they can get as the group stumbles along toward some hope of reprieve.

By volume, the most-heavily traded homebuilder stock Tuesday morning was

D.R. Horton

(DHI) - Get Report

, with nearly 800,000 shares in play just 90 minutes into the trading session.

Lennar

(LEN) - Get Report

followed close behind with 715,000 shares in play. D.R. Horton and Lennar gained 0.6% and 0.5%, respectively.

Nearly 660,000 shares of

KB Home

(KBH) - Get Report

were in play, though it was an outlier among the group as its stock teetered near the unchanged mark and was in negative territory, trading 0.3% lower.

Toll Brothers

(TOL) - Get Report

saw 555,000 shares change hands, and the stock added 2.1%.

The homebuilder group tends to move together in a tight band when it comes to stock price, with few outliers. That trend lends weight toward investing in sector-matched exchange-traded funds like the

SPDR S&P Homebuilders

(XHB) - Get Report

, an exchange-traded fund that tracks the homebuilder sector and counts D.R. Horton and Lennar among its top holdings. The

iShares Dow Jones US Home Construction

(ITB) - Get Report

ETF counts D.R. Horton, Lennar and KB Home among its top holdings.

The XHB gained 1.9% in early trading with nearly 800,000 shares changing hands. The ITB added 1% with 156,000 shares in play.

While any rise in new home construction is good for the sector, Tuesday morning's report on home construction was led by a 32.6% jump in large apartment starts, to an annual rate of 114,000 units. But apartments are just a small part of the home construction market. Single-family home construction fell 4.2% to an annual rate of 432,000, according to the Commerce Department report.

Applications for building permits, a good indication of future building, fell by 3.1% in July to a seasonally adjusted annual rate of 565,000, the lowest rate since May and a steeper decline than the expected rate of 580,000 units.

The outlook is tepid. "Activity in the housing market is likely to remain depressed for several years," noted Paul Ashworth, U.S. economist at Capital Economics. "Housing is not going to lead the economic recovery."

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

Some argue the forecast is not quite so abysmal. Deutsche Bank analyst Nishu Sood

issued upgrades last week

on D.R. Horton, Ryland

Ryland

(RYL)

and

Meritage Homes

(MTH) - Get Report

to buy from hold, joining the ranks of M.D.C. Holdings.

Sood said while the current housing downturn was the worst in recorded history, he expects the situation will not get any worse, though home prices are likely to continue to fall in the mid- to upper-end of the market.

"These historic issues may cause recovery to be slow, but will no longer prevent it from happening," he said.

>>Horton, Ryland Upgrades Lift Homebuilders

The data comes in the wake of a report from the National Association of Home Builders that showed

builder sentiment fell for the third straight month

, reflecting mounting hesitancy among potential home buyers and concern among builders that many more buyers are choosing to purchase foreclosed properties at fire-sale prices rather than newly built homes.

Record low mortgage rates failed to spark demand even for existing homes, according to

a report from the Mortgage Bankers Association last week

, as 78% of all mortgage applications were for homeowners looking to refinance their existing mortgages.

The still-struggling housing market saw sales ramp up this spring as consumers rushed to take advantage of federal tax credits that offered as much as $8,000 for first-time homebuyers and $6,500 for repeat buyers moving into new primary residences. Following the expiration of those credits on April 30, the market saw

a dramatic decline in demand

for the month of May that spilled over into June. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.

VOTE: Do We Need Another Homebuyer Tax Credit?

Would a new round of credits help or hurt the housing market?

-- Reported by Miriam Marcus Reimer from New York.

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>>New Home Construction Rises in July

>>Homebuilder Sentiment Edges Lower

>>4 Top Homebuilder Stocks: Life After the Tax Credit

>>POLL: Do We Need Another Homebuyer Tax Credit?

>>Mortgage Applications Tepid Despite Rates

>>Beazer Homes: Hard Times Ahead

>>Horton, Ryland Upgrades Lift Homebuilders

>>PulteGroup Returns To Profitability

>>Homebuilders Stock Winners and Losers

>>Home Prices Weaken, Sales Rise

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